RMB

Want to buy RUB/CNY directly? May soon be a possibility, the Russian central bank has told Chinese ambassador Li Hui. Xinhua reports a statement of intent from deputy head, Victor Melnikov, to the effect that Bank Rossii is willing to co-operate with China to effect a direct currency exchange between rouble and yuan.

Both countries are keen to deepen “financial co-ordination and mutual investment”, according to state-run media Xinhua. Dr Melnikov noted the economic and strategic significance of a direct exchange between the two currencies; the Chinese ambassador echoed these sentiments, and was keen to support Sino-Russian co-operation in economic, energy and science projects.

East Asian currencies are anything but stable viewed against the dollar: the Thai baht recently topped a 13-year high – and the yen and ringgit have both outpaced the baht’s rise so far this year. Viewed against each other, of course, these appreciating currencies are more stable.

New research challenges the habit of viewing all currencies against the dollar. It goes on to suggest that “considerable regional currency stability” can be achieved in east Asia if countries target the same basket of currencies as each other – even with no “explicit co-operation”.

China’s currency policy between mid-2006 and mid-2008 should be seen in this light, the paper argues; the simple view of the renminbi against the dollar does not explain the facts nearly as well. “The RMB behaved in this two-year period as if it were managed to appreciate gradually over time against its trade-weighted basket of currencies,” argue Guonan Ma and Robert N McCauley of BIS. Read more

Somewhat as predicted, or at least predicted by me, Tim Geithner went as far as he could go in suggesting that various options were on the table for trying to push the Chinese into letting the exchange rate rise without giving any hostages to fortune.

Whether prompted by inflation or politics, the yuan continues to strengthen, today at its highest level against the dollar since 1993. Seen in context, the strengthening is small – it’s the little squiggle on the far right of the chart, right. Compared to the currency’s ‘real’ value – according to the US – of USD1:RMB4-5, the shift is hard to spot.

But we have now seen five days of appreciation in a row, and the judicious appreciation of the Chinese currency makes good headlines, breaking records along the way. As Alan points out, it is likely to be just enough to deflect criticism at the G20. The chart below shows the daily midpoint set by Safe, the forex regulator, against the tolerance band of the original peg. Read more

China will allow foreign central banks and overseas lenders to start investing in the country’s domestic interbank bond market for the first time, in a move aimed at encouraging internationalisation of the Chinese currency.

The People’s Bank of China, the central bank, said on Tuesday it had launched a pilot project to allow greater foreign access to its largely closed domestic interbank bond market in order to “encourage cross-border Rmb [renminbi] trade settlement” and “broaden investment channels for Rmb to flow back [to China]”. Read more

It’s as if the depegging never happened: the latest exchange rate set by China places the value of the yuan squarely within its original trading bounds.

On June 18, when the yuan was still pegged, it was trading at 6.8275 per dollar, with a 0.5 per cent tolerance each side (blue lines). Since then, the daily midpoint, published by foreign exchange regulator Safe, has generally valued the currency very slightly stronger than its original band. Not today. Read more

Another day, another hint from Chinese regulators about the future opening up of the country’s capital account. The latest statement from Safe today said that it was considering introducing new foreign exchange instruments, as well as containing a pledge to push forward with selective capital account reforms.

There was no information about what these new products might be – market participants say that FX options are likely to be the next new development.

The hints about new openings in the foreign exchange market are partly directed at an overseas audience where there are already grumblings about the slow pace of change in the exchange rate since the initial fanfare (see chart). As Mark Williams at Capital Economics pointed out today in a note entitled ‘Return of the Peg’, the renminbi barely moved at all against the US dollar during July. Indeed, “the renminbi has actually weakened in trade-weighted terms since the reform was announced”. Read more

“If [the central bank] had raised the value of renminbi in March and raised interest rates in April, financial markets would have been more stable.” This from Japanese media Asahi Shimbun, interviewing Zhou Qiren, a member of the Monetary Policy Committee, an advisory body to the People’s Bank of China.

The short interview transcript is well worth a read. Mr Qiren also points out one obvious consequence of a more flexible, or floating, currency: its value may fall as well as rise. If exports were to start suffering, the yuan would weaken to help the economy, Mr Qiren said. So far, the value of the yuan has strengthened almost imperceptibly: the blue lines on the chart are the tolerance levels for the original value of the yuan on 19 June. (h/t Market Watch)

Is the People’s Bank of China planning to further liberate the yuan? The central bank has cut the commitment to “keep the yuan’s exchange rate basically stable” from its latest currency communique. The rest of the message repeated the existing policy, i.e. to improve the currency’s exchange rate mechanism, and adjust its value with reference to a basket of foreign currencies.

Although the currency’s peg was loosened on June 19, the daily midpoint set by Safe has barely strayed out of the tolerance levels of the original peg; the currency need only have been 0.3 per cent weaker to meet the original, pegged criteria. Against the US claims of the yuan’s ‘true value’, the currency’s ‘strengthening’ is barely discernible.

Who needs context? “Yuan ends near post-revaluation high,” runs one of many excitable headlines.

Since the great unpegging, the yuan hit a ‘peak’ of 6.7801 on Wednesday. That’s a peak-to-trough movement of 0.69 per cent in the past nine days. For comparison, the dollar-sterling exchange rate peak-to-trough movement has been four times that, at 2.9 per cent.Read more

Today, for the first time, the midpoint set by Safe exceeded the 0.5 per cent tolerance bands set around the original exchange rate of 6.8275 – by half a basis point.

Not as historic as many expected at the start of the week. But then ‘flexibility’ does not mean ‘strength’: a flexible exchange rate can go up or down. Geoff Dyer, the FT’s China bureau chief, points out that domestic and international takes on the new policy differ greatly – principally because their desires differ greatly. Internationally, a stronger yuan is wanted. Domestically, the “export lobby is welcoming [flexibility] as a way of protecting itself from a weaker euro.”

China’s new policy has not completely ruled out the prospects of a political showdown. The obvious flashpoint is if the euro does weaken substantially again.

One of the big risks for the Chinese authorities in beginning to gently appreciate the currency is that they set up a one-way bet for investors who believe that the renminbi can only get stronger from now on. Large inflows of hot money could make it difficult to conduct monetary policy, officials fear, and might potentially aggravate inflation.

That explains why there has been much more talk since Saturday about volatility in renminbi trading and using a currency basket as a reference. When China abandoned its currency peg in 2005, it said the renminbi would trade against a currency basket of its main trading partners, but in reality it trailed the US dollar and was much less volatile than the 0.5 per cent daily trading bands allowed.

“In one area, the emphasis will be different this time,” says Li Daokui, a central bank advisor who believes the authorities will pay more attention now to the basket in which the euro plays a large role. Economists who have been briefed by the central bank say that there will also be more daily volatility, in order to keep speculators on their toes.

This means that in principle, says Mr Li, that if the euro gets much weaker, the renminbi could fall against the dollar. Richard Yetsenga at HSBC says something similar: Read more

Forward prices for the renminbi are surging even though there is no exchange rate shift yet from the People’s Bank of China, which announced on Saturday it would “enhance flexibility” of the exchange rate. In a defensive statement lacking detail, the Bank said it would:

“further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.”

But two things suggest this change will not prove as significant as it could be. First, the language. The statement talks of ‘furthering’ and ‘enhancing’ the current policy, rather than changing it. The only change word, ‘reform’, is used to refer to a continuing process.

China’s central bank has spoken of measuring the yuan “with reference to a currency basket”. One of the bank’s academic advisers, Xia Bin, said the change in language suggests a change to the dollar peg, reports Business Week. An economist at Morgan Stanley interpreted the shift in the wording of the report as significant, and yuan forward prices have been rising for the past two days on speculation of a rise in the currency.

Reining in property speculation is not enough to combat inflation. An advisor to the Chinese central bank has said there is a fundamental problem with the PBoC mandate.

Zhou Qiren said there was “conflict” between the bank’s forex intervention and its job to manage liquidity and control inflation, reports Bloomberg. Speaking of the record levels of lending in 2009, he said: “Unless there are very forceful measures, that large amount of money will flow through the market. Even if you put lid on in one place, it will emerge somewhere else.” Read more

Growing evidence suggests a stronger yuan would not help the US economy nearly as much as thought, if at all. Even increased Chinese consumption is shown not to help much. So why do these assumptions continue to underpin politicians’ rhetoric?

Chinese saving less and spending more would have very little impact on US jobs (April 25)

A 15 per cent appreciation of the RMB would reduce the American trade deficit by 5 per cent by the end of next year, but would be short-lived and would not flow through to GDP (April 16);

“Chinese revaluation is in the interests of China, not the US” (April 16)

“People seem to ascribe a ridiculously outsized role to China’s currency policy in producing China’s trade surplus and America’s trade deficit. The level of rhetoric is simply not consistent with the impact of the peg.” (March 15)

Even large changes in Chinese currency or consumption have little effect on the other side of the Pacific: US-China trade is simply too small to transmit much of the effect, so the arguments run.

China’s foreign exchange regulator is considering cutting short-term foreign debt quotas for some commercial banks, three sources familiar with the situation said on Friday, as it seeks to curb speculation over yuan appreciation. Read more

“Chinese revaluation is not in the US interest.” This is one of the major conclusions from a collection of short essays on the Sino-US currency dispute (eBook). Other conclusions are that a revaluation is in China’s interest, and that the size of the RMB undervaluation is between 2.5 and 27.5 per cent.

The conclusions back up research performed by PwC for Money Supply on Friday. They found that while a renminbi appreciation would reduce the US trade deficit, the effects would not flow through to GDP and would, at any rate, be short-lived.

The latest of a stream of paper out of the IMF in the run-up to its meetings next week came out today: the analytical chapters (as opposed to the forecast) of the world economic outlook. Personally I’ve always thought they were more interesting than the forecast, since no-one is that good at macroeconomic forecasting and the Fund doesn’t have access to much more information than anyone else.

Anyway, this one is on economies that have exited from large current account surpluses and how they did it. Short of calling the chapter Memo To Beijing, it could scarcely be less explicit. No big surprise that they recommend an appreciating exchange rate. Read more

The Money Supply team

Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS

Claire Jones is the FT's Eurozone economy correspondent, based in Frankfurt. Prior to this, she was an economics reporter in London. Before joining the Financial Times, she was the editor of the Central Banking journal. Claire studied philosophy and economics at the London School of Economics. RSS

Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS

Sarah O’Connor is the FT’s economics correspondent in London. Before that, she was a Lex writer, covered the US economy from Washington and the Icelandic banking collapse from Reykjavik. Sarah studied Social and Political Sciences at Cambridge University and joined the FT in 2007. RSS

Ferdinando Giugliano is the FT's global economy news editor, based in London. Ferdinando holds a doctorate in economics from Oxford University, where he was also a lecturer, and has worked as a consultant for the Bank of Italy, the Economist Intelligence Unit and Oxera. He joined the FT in 2011 as a leader writer. RSS

Emily Cadman is an economics reporter at the FT, based in London. Prior to this, she worked as a data journalist and was head of interactive news at the Financial Times. She joined the FT in 2010, after working as a web editor at a variety of news organisations.
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Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS

Ben McLannahan covers markets and economics for the FT from Tokyo, and before that he wrote Lex notes from London and Hong Kong. He studied English at Cambridge University and joined the FT in 2007, after stints at the Economist Group and Institutional Investor. RSS